India shrinks corporate income tax rates

The Republic of India recently took steps to dramatically lower corporate tax rates and make other changes designed to boost growth and investment in the economy.

Under President Ram Nath Kovind’s 20 September ordinance, domestic Indian companies that fulfil certain conditions may opt to pay income tax at a base rate of 22% (down from 30% in many cases), and new manufacturing domestic companies may be eligible for a 15% base rate (down from 25%). The ordinance also modifies the minimum alternate tax (MAT) and makes other changes.

This article summarises the key changes set forth in the ordinance, known as Taxation Laws (Amendment) Ordinance 2019, which amends the Income Tax Act 1961 (the Act).

Corporate income tax rate

To be eligible under the ordinance to opt for the new 22% base rate, a domestic Indian company must fulfil certain conditions, including:

• The company must not claim particular deductions/incentives/exemptions (see the list below);
• The company must not set off any loss carried forward from an earlier assessment year if the loss is attributable to any of the deductions/incentives/exemptions mentioned above;
• The option needs to be exercised on or before the date of filing a return of income for the assessment year (AY) 2020–2021 and onwards.

Other notable features are:

• The option, once exercised for an AY, cannot be withdrawn in subsequent years;
• A surcharge shall apply at 10%;
• The new provisions are applicable from financial year 2019–2020 and onwards;
• There is no requirement to pay MAT.

(See new Section 115BAA of the Act.)

New manufacturing domestic companies

To give a boost to the government’s “Make in India” campaign, the legislation provides that certain new manufacturing companies may opt to pay income tax at a base rate of 15%. To qualify for the lower rate, these companies must incorporate on or after 1 October 2019, make fresh investment in manufacturing, and commence production on or before 31 March 2023. Certain other conditions apply including:

• The company is not engaged in any business other than manufacture/production;
• The company is not formed by splitting up or reconstruction of an existing company and does not use any old plant or machinery, although there are certain exceptions;
• The company must not claim particular deductions/incentives/exemptions (see the list below);
• The company must not set off any loss carried forward from an earlier assessment year if the loss is attributable to any of the deductions/incentives/exemptions mentioned above;
• The option needs to be exercised on or before the date of filing a return of income for AY 2020–2021 and onwards.

Other notable features are:

• The option, once exercised for an AY, cannot be withdrawn in subsequent years;
• A surcharge shall apply at 10%;
• The option is available from financial year 2019–2020 and onwards;
• There is no requirement to pay MAT;
• Transactions undertaken by such new manufacturing companies with domestic related parties shall be subject to domestic transfer-pricing provisions as well.

(See new Section 115BAB of the Act.)

Minimum alternate tax

The government also reduced the basic MAT rate from 18.5% to 15%, which will benefit domestic companies that usually pay their tax under MAT provisions. Further, new Sections 115BAA and 115BAB (discussed above) have been excluded from the purview of the MAT. (These provisions are applicable from AY 2020–21 and onwards.)

The following chart summarises the recent changes to corporate income tax rates.

* For companies with total income of more than INR 10 million but less than INR 100 million, the surcharge rate is 7%; if total income is more than INR 100 million, the surcharge rate is 12%.

Tax on stock buybacks

Under the ordinance, listed companies that made public announcement of a stock buyback on or before 5 July 2019 have been exempted from the levy of buyback distribution tax. The announcement must have been made in accordance with provisions of the Securities and Exchange Board of India Act, 1992, and regulations provided thereunder.

Some other relevant changes

• Under the ordinance, enhanced surcharges will not apply on capital gains arising on sale of any security including derivatives in hands of foreign portfolio investors.
• In announcing the ordinance, the government separately noted that it is expanding the scope of corporate social responsibility (CSR) funding. CSR funds can now be spent on incubators funded by central/state government/PSU/public agencies or contributions to publicly funded universities, India Institutes of Technology, and prescribed autonomous bodies engaged in conducting research in science, technology, engineering, and medicine aimed at promoting sustainable development goals.

A couple of other points

1. The ordinance does not address whether a MAT credit is available for companies that opt for the concessional tax rate of 22%/15%, given that MAT provisions will not apply to such companies. The government clarified this matter in Circular No. 29/2019, dated 2 October 2019, which states that a prior tax credit of MAT shall not be available once a company exercises this option.
2. The government has not reduced the highest tax slab rate of 30% applicable to individuals, LLPs, etc., which is clearly unfavourable and should be addressed to lessen the excess burden of tax on their shoulders.

The new ordinance is expected to spur new investments into India, thereby bolstering employment and infrastructure opportunities, and overall leading to economic development. The government’s step needs to be applauded, even though the new measures are anticipated to cost the government INR 1,45,000 crore (INR 1.45 trillion/USD 20.34 billion) per year in terms of tax revenue forgone. The lowered tax rates also are predicted to help put Indian companies in an advantageous position when operating globally.

List of excluded deductions/incentives/exemptions

• Tax holiday under Section 10AA;
• Additional depreciation under Section 32(1)(iia);
• Allowance under Section 32AD for investment in new plant or machinery in notified backward areas;
• Deduction under Section 33AB for deposit of money to tea/coffee/rubber development account;
• Deduction under Section 33ABA available to oilfield service providers for contribution to site restoration fund;
• Weighted deduction for scientific research under Section 35;
• Deduction of capital expenditure for specified businesses under Section 35AD;
• Weighted deduction for expenditure on agricultural extension project under Section 35CCC;
• Weighted deduction for skill development project under Section 35CCD; and
• Deductions under Chapter VI-A under heading “C. Deductions in respect of certain incomes” such as Section 80-IA, 80-IAB, 80-IAC, 80-IB, etc.

— Saurabh Sachdeva is a qualified Chartered Accountant from Faridabad, India, having six years of relevant experience in international tax and transfer-pricing matters. To comment on this article or to suggest an idea for another article, contact Dave Strausfeld, an FM magazine senior editor, at David.Strausfeld@aicpa-cima.com.